The alpha-fetoprotein gene (AFP) is tightly regulated at the tissue-specific level, with expression confined to endoderm-derived cells. We have reconstituted AFP transcription on chromatin-assembled DNA templates in vitro. Our studies show that chromatin assembly is essential for hepatic-specific expression of the AFP gene. While nucleosome-free AFP DNA is robustly transcribed in vitro by both cervical (HeLa) and hepatocellular (HepG2) carcinoma extracts, the general transcription factors and transactivators present in HeLa extract cannot relieve chromatin-mediated repression of AFP. In contrast, preincubation with either HepG2 extract or HeLa extract supplemented with recombinant hepatocyte nuclear factor 3 alpha (HNF3alpha), a hepatic-enriched factor expressed very early during liver development, is sufficient to confer transcriptional activation on a chromatin-repressed AFP template. Transient transfection studies illustrate that HNF3alpha can activate AFP expression in a non-liver cellular environment, confirming a pivotal role for HNF3alpha in establishing hepatic-specific gene expression. Restriction enzyme accessibility assays reveal that HNF3alpha promotes the assembly of an open chromatin structure at the AFP promoter. Combined, these functional and structural data suggest that chromatin assembly establishes a barrier to block inappropriate expression of AFP in non-hepatic tissues and that tissue-specific factors, such as HNF3alpha, are required to alleviate the chromatin-mediated repression.